Citigroup to Relaunch Embattled Alternative Investments Arm

In a move that seems intent on proving the great skeptics wrong, Citigroup (C) is planning a relaunch of Citi Alternative Investments, a unit that contains its troubled hedge fund operations, according to a report in The Financial Times.

Unnmaed sources within the financial service major told the FT that Citigroup is seeking to rebrand the unit — which presently has $14 billion under management and also includes private equity businesses — from Citi Alternative Investments [CAI] to Citi Capital Advisors. The move is intended to distance the embattled alternative investments arm from two years of downright awful performance and negative publicity.

The report said the move follows months of dispute between CAI management and some top bank executives about what to do with the unit. Some of its executives — John Dorfman and Jim O’Brien, two former Morgan Stanley (MS) execs who run CAI — wanted to drop the Citi name all together, suggesting naming the unit, Carlton Hil, but others rejected the idea out of fear that dropping the bank’s name would imply that Citi was looking to get rid of its investment arm.

The daily also said that the fate of CAI, closely associated with Citigroup Chief Executive Vikram Pandit (Citi ponied up $800 million to buy Old Lane Partners in April 2007, founded by former Morgan Stanley exec. Vikram Pandit), is looking to raise $2.5 billion in external capital in 2010, targeting sovereign wealth funds and other investors in emerging markets. CAI has been able to raise a little more than $150 million so far, according to the paper.

Citigroup declined to comment on the name change but said the unit was “a highly valued part of Citi’s core franchise.”